Deciding to hire employees and having a payroll is a big decision for small businesses. This can add new complexities to a business’s accounting system because the business will not only have to pay the employees, but the business has to pay federal employer taxes and state unemployment taxes. Due to this additional complexity, it helps to go through an accounting firm that offers payroll services.

Payroll includes the following elements. There are wages, which is the gross amount (amount before any withholding for income taxes or payroll taxes). Federal income tax withholdings are another component of payroll where the employer takes part of the employees pay and sets it aside for the income tax bill. There are also employment taxes, usually, this is referred to as FICA taxes. FICA taxes are made up of Social Security taxes and Medicare taxes. Employees and employers pay 6.2% and 1.45% for these amounts.

Choosing the correct business entity is important because each entity type has different legal protection and have different tax advantages. There are a few different types of business structures. There are Sole Proprietorships, LLCs, Partnerships, S-Corps, and C-Corp that you can choose to make your business.

Sole Proprietorships provide no additional legal protection from the business and your personal life because sole proprietorships are not a separate legal entity. They are seen as an extension of the individual and are taxed at the individual level on schedule c of form 1040. The individual will have to pay self-employment tax on the profits of the business.

Partnerships require at least two different partners to form, these partners can be businesses or individuals. In a partnership, there is additional legal protection for a partner’s personal assets which can become beneficial in the case of a lawsuit. Partnerships are taxed through form 1065, which could require additional tax preparation fees, but can add tax savings to the partnerships depending on how the income is structured to flow through to them on the individual level.

Having a sound accounting system can be the make or break aspect of a small business. Accounting systems are different than bookkeeping. An accounting system is the how the business handles each step of the financial system of the business. This can be the sales cycle, payroll, inventory management, accounts payable, and accounts receivable management.

One of the biggest areas that is important for small businesses is having a well-established sales cycle because if you do not know how much someone owes you or who owes you money you will not be collecting any revenue. It is important to establish a system that tracks either sales or products or tracking the services you provide for your customers. One way to do this is through invoicing. Have an invoice that says the date of the invoice, when the money is owed, what the invoice is for, and number them numerically so that they are easier to manage.